People in the village of Obyarai, in the Katine sub-county of Uganda, were devastated when a severe storm in October 2011 ripped off the corrugated iron roofs of two classroom blocks, a store room and an office in its primary school.

The rainwater destroyed desks, benches and textbooks and flooded the buildings. The school management committee immediately alerted the district education officer, but members were told there was no money in the budget for any new building work for two years.

There was little the committee could do except resume classes under the tree in the centre of the school grounds and in the nearby mud-and-wattle hut where people meet for church on Sundays. Sitting down with the school's parent-teacher association (PTA), they wondered how long it would take for the community to raise money for repairs.

Two years later, new roofs have been fitted and, while there's still some touching up left to do, school life is returning to normal. "We have all the materials, and by the beginning of the third school term, work should be complete," says Moses Eciku, chairman of the PTA.

But the repairs were only possible in this relatively quick timeframe because the Observer and Barclays bank stepped in to help villagers secure almost 60m Ugandan shillings (£14,640) to pay for materials and labour.

What happened in Obyarai highlights the continuing vulnerability of this rural sub-county of north-east Uganda, which the Observer has supported since 2007. That is why this year's Observer Christmas appeal will provide a much needed financial safety net for the community.

Katine is home to more than 30,000 people. Six years ago it had the worst health and living conditions in Uganda. It was also recovering from more than two decades of instability and conflict.

With the support of Observer and Guardian readers and Barclays, two NGOs – African Medical and Research Foundation (Amref) and Farm Africa – implemented a development programme in the sub-county to improve healthcare, education and water and sanitation, as well as empowering villagers to fight for their rights and improve their livelihoods. Progress was charted on a Guardian website.

Since 2007, significant improvements have been made. The proportion of people with access to safe drinking water increased from 42% to 93%, thanks to 19 new boreholes and repairs to existing wells and springs. Solar panels were installed at the health centre, powering the fridge that keeps vaccines at the correct temperature, and a laboratory was constructed, allowing HIV and malaria tests to be conducted locally.

More than 270 people were trained to work in village health teams, offering basic health advice and services to their communities. More than 7,000 mosquito nets were distributed. School buildings were built and repaired, and textbooks and desks were delivered. PTAs and school management committees were created to help schools operate more efficiently, along with water source committees to manage boreholes and wells.

Farmers were organised into groups and given training in new farming techniques. They were also supplied with seed varieties that are resistant to droughts, which occur regularly in this region. And a basic microfinance system – village savings and loans associations – was set up in each farmers' group, with a committee that would give members access to cash to develop business ideas or to use in emergencies.

But the achievements made in Katine remain fragile. The district's limited budgets mean the area is still reliant on support from outside organisations – NGOs or church groups. The original Katine project was extended from three to six years as it became clear residents would need longer-term support for the development work to be sustainable.

One way to address sustainability is to provide a pot of money that can be used by the community for investments or, in the case of Obyarai school, for use in times of trouble.

Money raised through the Christmas appeal will pay for a loan guarantee fund at the local Barclays bank. It will be managed by the Katine Joint Farmers' Co-operative Society. Made up of local farmers, the group is supported by Farm Africa, which will train members in business and financial management.

The co-operative was set up to manage the sub-county's produce store, which opened in 2011. It buys and stores excess crops from farmers, giving them a ready market for their produce and increasing their profit margins, as it can be sold in bulk. But the co-operative also provides a savings facility and lends money to individuals and community groups in Katine, the majority of whom have no other means of accessing credit. Loans have to be paid back within six months and interest is charged at 3% a month. Borrowers are assessed for their ability to pay before loans are agreed.

The co-operative has a loan portfolio of more than 25m shillings, but requests for loans are increasing and it is unable to meet the demand. The loan guarantee will allow the co-op to access a low interest, cash-secured overdraft from which it can source more money to lend locally.

David Ogwang, a Ugandan livelihoods specialist who will be working with Farm Africa in Katine, said the co-operative was in a key position to support the community, because it was now obvious that people cannot rely on the state to provide adequate basic services in this part of Uganda.

"The key issue is improving the income of people so that they are able to access services," he says. "How can they do that? By contributing towards the cost. If the co-operative is more able to support groups, the money generated will go into the community, so people will be able to afford these services."

Back in Obyarai, the management committee and the PTA are discussing the possibility of building a high school so their children don't have to walk a 20km round trip to attend the nearest secondary. "It's still an idea, there is no thorough plan yet," says Eciku. But knowing money could be borrowed locally to fund the project means there is a real chance the idea will become a reality in the very near future.